Answer to Question #325067 in Management for keda

Question

A 5-year project will require an investment of $100 million. Plant and machinery worth $80 million and a net working capital of $20 million.

80,000 new common shares are issued, the market price of which is $500 per share. Shares will offer a dividend of $4 per share in year 1, expected to grow at a rate of 9% per year for an indefinite tenure. Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having a face value of $1,000. These bonds now have a market value of $1,150 each. At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the net working capital will be liquidated at its book value. The project is expected to increase revenues of the firm by $120 million per year. Expenses, other than depreciation, interest and tax, will amount to $80 million per year. The firm is subject to a tax rate of 30% Plant and machinery will be depreciated at the rate of 25% per year as per the written-downvalue method.

Compute the FCF for years 1 through 5